SC on Under Insurance, Averaging Out and Duty of Insurance Company

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January 17, 2018

In a recent case, two-Judge Bench of the Supreme Court broadly discussed the principles of “Under-Insurance” and “Averaging out” under the Law of Insurance. In the case I.C. Sharma v. The Oriental Insurance Co. Ltd., the Appellant had approached the Apex Court against the National Commission’s order.

Brief facts of the case are that the Appellant had purchased a Householder Insurance Policy from the Respondent Insurance Company.

The Policy in question was renewed till 22.12.2005. As per the policy the coverage of articles/items in the Appellant’s house was “as per list”. Pursuant to expiry of Policy on 22.12.2005 a fresh policy was registered as per new scheme on 19.01.2006 and the same was renewed form time to time. Meanwhile, the appellant went to the United Kingdom and burglary took place inside the Appellant’s house.

In the alleged burglary, the appellant’s household items were stolen for which the appellant claimed from the Respondent. However, the Appellant was dissatisfied with the amount at which his loss was valued by National Commission, wherein the Commission observed that once the appellant had supplied a list of articles for the first policy, if there was any change he should have filed a fresh list and since a large number of articles were not mentioned in the list the claimant was not entitled to the amount claimed by him.

Also read What Amount of Insurance Policy can be claimed?

Also read Rejection of Insurance Claims – reasons and remedies

Bench’s Verdict– While deciding the case, the Supreme Court deliberated on the Principles of Under-Insurance and Averaging Out to decide the amount of claim,

What is Under Insurance and the effect thereof?

Under-insurance basically means that the insured has taken out an insurance policy in which he has valued the insured items for a sum which is less than the actual value of the insured item. In a country like India this is normally done to pay a lesser premium. This is, in fact, harmful to the policy holder and not to the Insurance Company because even if the entire insured property is lost, the policy holder will only get the maximum sum for which the property has been insured and not a paisa more than the sum insured.

When can the Insurance Company apply the principle of averaging out?

In case a person gets a painting insured for Rs.1,00,000/- though the value of the same is Rs.10,00,000/-, if the painting is lost the insured is entitled to Rs.1,00,000/- only. If all the insured goods falling under one head are stolen or lost then the insurance company cannot apply the principle of averaging out because, though the loss may be Rs.10,00,000/-, the claimant will get only one Rs.1,00,000/-as per the value assessed and the insurance premium paid by him.

The Insurance Company can however apply the principle of averaging out when all the goods are not destroyed. Supposing the entire house was insured for Rs.50,00,000/-, but on valuation it is found that the value of the structure and the goods was Rs.1,00,00,000/- and if the policy holder claims that he has suffered loss of Rs.40,00,000/- then he will be entitled to only Rs.20,00,000/-, by applying the principle of averaging out. What this means is that if the value of the goods is more than the sum for which they are insured then it is presumed that the policy holder has not taken out insurance policy for the un-insured value of the goods. The claim is allowed by applying the principle of averaging out, i.e. the insured is paid an amount proportionate to the extent of insurance as compared to the actual value of the goods insured.

Insurance company must at the time of accepting the premium advise the policy holder properly

In this context, the Supreme Court stated that if the insurance company desires that item-wise valuation should be given for items over and above a certain value then it is the duty of the insurance company to advise the insured at the time of issuing the first policy of insurance and at the time of each renewal. The insurance company must at the time of accepting the premium advise the policy holder properly. The insurance company cannot accept the premium without asking for any details and later deny its liability on the ground that such details were not given.

Read the case here.

Also read SC on what is Fundamental Breach of Contract of Insurance